The main test of a budget at this time is what it does for the recovery and growth of the British economy. George Osborne has repeatedly made clear that he wants to be judged by this test. He believes that deficit reduction is a growth policy which will be vindicated by its results. Growth has been postponed but, he insists, it is about to happen. So is he right?

Some people believe this debate is not even worth having. For instance, the economist Tim Congdon has dismissed the debate between austerity and growth as "nonsense". The evidence, he claimed, was clear: countries with smaller government deficits grow faster than countries with larger ones. This is untrue, as a general rule. According to the International Monetary Fund, the US, whose government debt to GDP ratio is 105% and whose deficit is 7.9% of GDP, is projected to grow by 1.8% this year; while Britain, with a debt ratio of 81% and a deficit of 7.0% of GDP, is expected to grow by just 0.8%.

Intuitively one would expect economic growth to shrink the deficit and stagnation to enlarge it, because growth increases government revenues and reduces expenditure on the unemployed. The fact that net public sector borrowing in February was £15.2bn, up from £8.9bn last February and almost double the forecast £8bn, confirms this expectation.

Osborne claims his deficit reduction plan is on course and borrowing has come in below targets – but these are the same targets that were revised upwards by £112bn only in November. Keynes's remark, "look after unemployment and the budget will look after itself" is more to the point than Osborne's "look after the budget and unemployment will look after itself".

Osborne's claim rests on the view that a shrinking deficit will automatically, if mysteriously, revive the "animal spirits" of businessmen, while confidence in the government's finances will reduce the cost of its borrowing. However, the opposite logic is more compelling. If the government is cutting its own spending at the same time as households and businesses are cutting theirs, the result is a fall in total spending which means a fall in total buying. This depresses output and employment. And the low cost of government borrowing may not be a sign of confidence at all. It may mean the money has nowhere better to go, or simply that the Bank of England is busily buying up government debt.

Osborne has said the government cannot afford to spend at the present rate because it hasn't got the money. But if the country were more fully employed, the government would receive extra revenue – which would make its spending "affordable".

Osborne aims to cut down waste in the public services. And there is a lot of waste. But cutting waste also means cutting jobs, and that creates even greater waste. It is odd that people who pride themselves on sound thinking prefer the total waste of unemployment to the partial waste of public employment. The most extravagant housing scheme still leaves the nation with houses. Unemployment leaves it with worse than nothing, for prolonged idleness renders the unemployed unemployable.

Ed Miliband was right to highlight the failure of Osborne's "budget for growth" last year. Twelve months ago the forecast growth for 2012 was three times the meagre 0.8% figure revealed by the Office for Budget Responsibility, now hailed by Osborne as an improvement. He blames the eurozone crisis and high oil prices for the continued sluggishness of the recovery – anything but his own policy. Labour has also started to argue that austerity is not enough: hence Miliband's welcome endorsement of the idea of a British investment bank, which could become a powerful engine for jolting us out of our semi-slump.

But Labour has not engaged directly with Osborne's claim that budgetary austerity is necessary to get us out of our economic hole. Indeed, it would be difficult for it to do so, since the logic was accepted by Osborne's predecessor, Alistair Darling. Instead the party has skirmished at the edges – about the speed of the cuts and distribution of sacrifice. So it has been bereft of the strongest anti-cuts argument: the boom, not the slump, is the time for Treasury austerity.

The debate we need to have is intellectual, not party political. One doesn't have to be a Conservative to support Osborne's cuts (evidently the Lib Dems do), and one doesn't have to be Labour to oppose them. The intellectual debate opens up a wide field for distinguishing between good and bad capitalism. It needs to be framed in a European as well as a British framework, since the eurozone's recovery prospects are even more dire than our own, and Europe offers examples of a more benign capitalism than our own Anglo-American model. It is only through vigorous intellectual give and take that one can hope to rekindle people's interest in politics.